Guggenheim: Barracuda Networks, Palo Alto Better Cybersecurity Picks Than FireEye, Fortinet And Imperva

In a report published Tuesday, Guggenheim analyst Ryan Hutchinson initiated coverage of five companies in the Cyber Security domain, saying that security had become the #1 priority in IT budgets. Moreover, the landscape of the security market is changing rapidly where "yesterday’s solutions are constantly facing off against tomorrow’s threats."

Analyst Ryan Hutchinson believes that the penetration of large enterprises by next-gen cyber-security vendors is still below 10 and that the "ongoing upgrade opportunity should be a rising tide for all boats in 2015 and beyond."

For two years, security stocks have outperformed the broader indices and the valuations in the industry are at record highs. Nonetheless, security spending is likely to remain strong in the near to medium term. "Investors should focus on vendors that possess the most comprehensive product set and roadmap (commonly referred to as platform plays), and long-term operating models that can support current valuations," Hutchinson wrote.

In the report Guggenheim notes its top picks in the cyber-security industry as:

1. Barracuda Networks Inc CUDA - Coverage has been initiated with a Buy rating and a price target of $45. The company has a "unique SMB-focused business model with strong recurring revenue, good visibility, and operating leverage." The company faces the Greenfield cross-selling and TAM expansion opportunities, with improving international and public cloud penetration.
2. Palo Alto Networks Inc PANW - Guggenheim has assumed coverage with a Buy rating and a price target of $200. The company is a leading next-gen firewall (NGFW) vendor that has evolved into the premier enterprise security platform. "Despite a rich valuation, we believe the stock can continue to move higher as PANW executes and takes share."
3. Proofpoint Inc PFPT - Coverage initiated with a Buy rating and a price target of $66. The company is a leading email security provider that is consolidating the high end of the market and taking share from CSCO and SYMC. The company has a SaaS-based business model, with "recurring revenue, strong visibility, and market-leading technology."

Hutchinson initiated coverage of three companies with a Neutral rating:

1. FireEye Inc FEYE - The company is a leading provider of advanced threat protection (ATP) technologies, including network sandboxing, threat intelligence, incident response and consulting. "While we believe FireEye's technology is truly best-of-breed, we are unsure the company can meet its financial goals."
2. Fortinet Inc FTNT - The company is a provider of SMB and carrier-class firewalls, and is expanding its portfolio of next-gen security products. It is primarily known for the FortiGate firewall. Although the near-term trends are positive, there is risk of the company hitting operating targets.
3. Imperva Inc IMPV - The company boast of the best-in-class web-application firewall (WAF) and data-centric audit and protection (DCAP) capabilities. With new management in place, the company now "must be consistent with messaging and execution around returning towards 25%+ growth."